Wednesday, December 7, 2011

With continued fear surrounding the banking and monetary system, today King World News interviewed Peter Schiff, CEO of Europacific Capital. When asked about gold, Schiff remarked, “I think we’re going higher. The gold stocks, to me, look like they are headed a lot higher. They need to breakout from the consolidation that they have been in. For the last year we’ve been consolidating. If you look at the HUI index, with 600 being the high and 500 being the low, we’ve been in that 100 point trading band more or less ever since late 2010.”

With gold hanging around the $1,700 level and silver near $32, today King World News is pleased to share with KWN readers a piece of legendary technical analyst Louise Yamada’s “Technical Perspectives” report. This information is not available to the public and we are grateful to Louise for sharing her incredible work with KWN readers globally.

Speaking to Mineweb the week after posting a letter on King World News calling on silver producers to act to ensure that the physical market, rather than the paper one, determine the price of the metal, Sprott said that he wished producers of the metal would " finally realise what the paper boys did to them in 2008 - they nearly bankrupted them all and yet they haven't got involved in these lawsuits which I find troubling."

Asked whether or not he has received any feedback from the producers on his suggestion that they "reinvest 25% of their 2011 earnings back into physical silver," Sprott said that there had been a groundswell of interest - more than he had ever seen before - but that still more needs to be done.

Sprott says that the idea stems from two factors currently at play within the silver market: the first is the general weakness seen within the global banking system, the second is the level of volatility in the system.

"For example, when silver hits $49.50 between the various paper markets, there was something like one billion ounces of paper silver sold that day - and purchased of course. But, we only produce about 900 million ounces a year... what do you think of the guys who were selling a billion ounces of silver who didn't have a hope in hell of providing it?"

By investing in the physical market, Sprott believes, producers would be able to show that there is indeed an imbalance in the physical silver market.

"It's a pretty fine line right now whether they can meet all the demand on a day-to-day basis, if by putting 25% of their cash into silver - it might have the effect of decreasing the supply by around 10 percentage points... I believe 10 percentage points would be enough to make a difference."

He adds, "I'm very frustrated by what's going on in the paper silver market. I just find it unbelievable that you can have silver go down $6 in 13 minutes one time when the markets weren't really open and then you get four margin rate increases the next week - four... It smells like a set up to me."

SILVER PROSPECTS

This frustration is made all the more acute for Sprott because of the strong underlying story he sees playing out in the physical market.

Currently, he says, there is nothing in the macroeconomic environment that would lead him to think that people don't want to own physical silver.

Over the long term Sprott believes that he market has made gold the reserve currency.

"I don't care whether the central banks have or governments have, but the markets made it the reserve currency... central banks have been aiding and abetting that process - they're almost making it the reserve currency by their actions, not by their statements and when it was a reserve currency silver traded at a ratio of 15 to 16:1 of the price of gold."

Over the shorter term, he says there is clear evidence of strong demand for the metal, "demand for silver is versus the demand for gold in the investment arena and when I see people like Gold Money sell as many dollars of silver, as gold. When I see the US Mint sell as many dollars of silver as gold which by the way implies in both instances, 50 times more physical than gold. And when we did the IPO for Gold Trust we made $440 million. When we did the IPO for the Silver Trust we made $550 million...Well how can the price be 50:1 when the money is going in 1:1?"

Most of the time, I recommend stocks to buy and hold. I sell when stocks reach what appears to be their full gains potential or, less often, when the company fails to live up to my expectations. Occasionally, I’ll also give out lists of stocks to avoid because of their subpar outlook.

At this point in the market cycle, though, I see another opportunity shaping up — for aggressive investors only. If you’ve got the nerves and the financial resources to play the game, I believe there’s good money to be made selling individual stocks short.

Short sellers borrow stock (from a broker) and sell the shares, hoping to buy them back later at a lower price. The difference, minus commissions and any dividends payable to the owner of the stock, represents the short seller’s profit.

In a strongly uptrending market, it’s tough to find many stocks that seem due for a fall. However, the market climate has changed during the past few months. “Accidents” are proliferating — and some short sellers, at least, are cleaning up.

A fresh-perked example: In October, hedge-fund manager David Einhorn disclosed at an investment conference that he was shorting Green Mountain Coffee Roasters(NASDAQ:GMCR). Not only did Einhorn denounce the stock as overvalued, but he went further and accused management of accounting shenanigans.

Naturally, the company’s legion of supporters poured cold water on his arguments. But then … uh-oh! On Nov. 10, GMCR came out with disappointing quarterly earnings — and the stock cratered, off 39% in day. Score one for Einhorn.

Screening for Losers

Where do we find the market’s next set of disasters waiting to happen? I ran a screen recently that focused on three criteria to help identify vulnerable stocks. (You want to short the sickly wildebeests in the herd, not the alpha males.) I looked for names that:

Already have skidded at least 20% from their 52-week highs — a sign that some investors might know the company has problems.

Are operating at a much lower level of profitability (return on equity) than the market average.

Are trading at more than 20 times projected earnings for the year ahead (overvalued stock).

Interestingly enough, certain industry groups popped up repeatedly in my screen: homebuilders and related suppliers, outdoor advertising firms, a sprinkling of faddish Internet-based businesses, and a bumper crop of Chinese outfits — a hint that the next really big market blow-up might be brewing in Shanghai, rather than Athens or Rome.

What to Do Now

When shorting these stocks, always remember to set a stop-loss at a reasonable level above your entry (I recommend 15%). Place your stop order soon after your short is executed, and make the order good till canceled. That way, you’ll be taken out of the position automatically if some unexpected development pushes the stock up to your stop-loss. Never short stocks without a stop; you’ll expose yourself to theoretically unlimited losses.

While the silver price (NYSEARCA:SLV) moves higher with the gold price (NYSEARCA:GLD) during this latest consolidation phase in the bull market for precious metals, Goldmoney’s James Turk expects another violent move higher for the metals, especially the price of silver.

“This move [in the silver price] is going to catch a lot of people by surprise as evidenced by the extremely low sentiment readings,” Turk told King World News, Monday, pointing to the lack of overall enthusiasm in the precious metals market of late, with a relatively steep contango in the silverfutures market chain serving to support his thesis. “Those low readings are a clear indication that there is a lot of money on the sidelines that is waiting to jump on board.”

Such low sentiment readings and steep contango prices in the silverfutures haven’t been seen since the first quarter of 2010, when problems in the Greek sovereign debt market first emerged. At that time, fears of another Lehman event, this time from Europe, took the DJIA sharply lower from its intermediate post-crash peek of 11,250, down to 9,600, a nearly 15 percent correction in the 30 Industrials.

In contrast, after trading between the $15 and $18 range during a nine-month period of September 2009 and June 2010, the silver price climbed higher in the face of a risk-off-then-risk-on-again trade in stocks of 2010 as the white metal never looked back, soaring to just shy of $50, from the $15 base of the previous flagpole pattern.

The tremendous rally in the silver price took Wall Street by surprise, as any asset rising this rapidly typically begets a much wider audience beyond the silver bug watchers. That contrarian signal suggested to legendary commodities investor Jim Rogers that the silver price would need to “settle down” before he’d become a buyer again. The weak hands had taken over the silver market.

But as the silver bugs remember, all too well, the steep and dramatic drop in the silver price to $25 sent the weak hands to slaughter, as a series of five margin hikes compound the pressure of a rapidly falling market to sell into the hands of the strong.

“During a big correction like the one we’ve just gone through, a lot of weak hands get shaken out of the market,” said Turk. “We know that has happened because of the change in open interest and also because of the smaller volumes of late.”

Today, the situation has reversed direction, according to Turk. Silver futures are back in contango and Jim Rogers is talking about silver once again. Moreover, as the crisis in Europe escalates, Europe’s new ECB chief, Goldman Sachs alumnus Mario Draghi is now printing approximately 30 percent more than the Fed is—and the European central bank needs to print more, and could get some needed help from the Fed, according to zerohedge.com.

“Throughout history, when things have gone wrong, they [central banks] print money … when they print money, you should own silver, you should own rice, you should own real assets,” Rogers said in an interview with CNBC of Nov. 23. See BER article.

Back to Turk, who said he’s calculated a target for the silver price during the upcoming next leg higher. By taking the April 2011 high and subtracting the September 2009 and June 2010 base price—a common and fairly successful technique applied in the use of technical analysis—Turk expects the next move higher will achieve an all-time record price for the metal.

“The first we have already spoken about, namely the bullish flag pattern on the weekly silver chart (above). When silver breaks out to the upside, this flag measures to a target price of around $68 to $70,” Turk explained. “More importantly, the jump out of the flag should happen more quickly than the $18 to $50 move we saw back in 2010 and early 2011, which took about nine months.”

One of the main principles of economics is this: people respond to incentives. As a shareholder, you should know how the people running your business are being incentivized.

In other words, are the executives being paid astronomical salaries and overly-generous bonuses regardless of business performance? Or do they have a vested interest in the long-term value of the company?

You want the people running your business to have some skin in the game. And I'm not just talking about a few stock options. Ideally, you want a decent chunk of their net worth tied up in the long-term value of the company through significant stock ownership.

This will tell you whether or not their incentives are truly aligned with yours as a shareholder. When they're making business decisions, are they more concerned about a fat bonus check or the long-term creation of shareholder wealth?

Long-Term Incentives

Executives with a lot of personal wealth tied up in the company are motivated to do what's best for the business over the long-term. They are more likely to forego short-term gains at the expense of long-term value.

Rather than push through a questionable deal, for instance, because of some vague "synergies" that may or may not materialize, owners will consider whether or not real value is being created over the long-term. But an executive who is compensated by hitting quarterly EPS targets will likely push the deal through even though it may be a poor use of capital and destroy value in the long run.

This principal-agent problem is a concept we've all seen before. Think about the kind of service you typically get at a big box retailer compared to the service of a small business owner. Let's be honest, the hourly worker doesn't care whether or not you come back or if you refer friends and family to their store. The business owner does. Why? Because they have a long-term interest.

Do the people on the inside have a vested interest in the long-term value of the company? It's an important item to consider when evaluating a stock to buy.

Kronos manufactures titanium oxide pigments. TiO2 is a fine white powder used in products like paints, plastics and paper to give them maximum whiteness and opacity. Insiders own more than 80% of the company, most of which is held by Chairman of the Board Harold Simmons. Another good sign: no insider has sold any shares over the last 12 months. In fact, insiders have bought more than $12 million worth of stock in the last year.

MSC is one of the largest direct marketers of industrial supplies and equipment used primarily in metalworking and maintenance, repair, and operations products. Over the last 10 years, MSC has seen average revenue growth of 9%, average EPS growth of 19%, and steadily rising returns on invested capital. Maybe that has something to do with the fact that insiders own more than 90% of the company.

Amtrust Financial is a property and casualty insurance company specializing in coverage for small- to mid-sized businesses. All executive officers and directors together own more than 60% of the company. Founders George and Michael Karfunkel still serve on the Board of Directors and together with CEO Barry Zyskind, own and control the majority of shares outstanding. It's also worth noting that they do not receive any compensation for serving on the Board of Directors.

Headquartered in Troy, Michigan, Syntel provides Information Technology (IT) and Knowledge Process Outsourcing (KPO) solutions. Revenue has grown at a healthy 12% average clip over the last decade while EPS has grown at a remarkable 30% average rate over the same period. The company also carries no debt. Chairman of the Board Bharat Desai co-founded Syntel in 1980 with his future wife Neerja Sethi, who still serves as Vice President of Corporate Affairs. Together they own more than 62% of the company.

The Bottom Line

When evaluating a stock, it's important to know whether or not the interests of the company's executives are aligned with yours. And when it comes to running a business, nobody cares as much as an owner.

Many Greeks are draining their savings accounts because they are out of work, face rising taxes or are afraid the country will be forced to leave the euro zone. By withdrawing money, they are forcing banks to scale back their lending -- and are inadvertently making the recession even worse.

Georgios Provopoulos, the governor of the central bank of Greece, is a man of statistics, and they speak a clear language. "In September and October, savings and time deposits fell by a further 13 to 14 billion euros. In the first 10 days of November the decline continued on a large scale," he recently told the economic affairs committee of the Greek parliament.

With disarming honesty, the central banker explained to the lawmakers why the Greek economy isn't managing to recover from a recession that has gone on for three years now: "Our banking system lacks the scope to finance growth."

He means that the outflow of funds from Greek bank accounts has been accelerating rapidly. At the start of 2010, savings and time deposits held by private households in Greece totalled €237.7 billion -- by the end of 2011, they had fallen by €49 billion. Since then, the decline has been gaining momentum. Savings fell by a further €5.4 billion in September and by an estimated €8.5 billion in October -- the biggest monthly outflow of funds since the start of the debt crisis in late 2009.

The raid on bank accounts stems from deep uncertainty in Greek households which culminated in early November during the political turmoil that followed the announcement by then-Prime Minister Georgios Papandreou of a referendum on the second Greek bailout package.

Papandreou withdrew the plan and stepped down following an outcry among other European leaders against the referendum, and a new government was formed on Nov. 11 under former central banker Loukas Papademos. That appears to have slowed the drop in bank savings, at least for the time being.

Bank Withdrawals Worsening Crisis

Nevertheless, the Greeks today only have €170 billion in savings -- almost 30 percent less than at the start of 2010.

The hemorrhaging of bank savings has had a disastrous impact on the economy. Many companies have had to tap into their reserves during the recession because banks have become more reluctant to lend. More Greek families are now living off their savings because they have lost their jobs or have had their salaries or pensions cut.

In August, unemployment reached 18.4 percent. Many Greeks now hoard their savings in their homes because they are worried the banking system may collapse.

Those who can are trying to shift their funds abroad. The Greek central bank estimates that around a fifth of the deposits withdrawn have been moved out of the country. "There is a lot of uncertainty," says Panagiotis Nikoloudis, president of the National Agency for Combating Money Laundering.

The banks are exploiting that insecurity. "They are asking their customers whether they wouldn't rather invest their money in Liechtenstein, Switzerland or Germany."

Nikoloudis has detected a further trend. At first, it was just a few people trying to withdraw large sums of money. Now it's large numbers of people moving small sums. Ypatia K., a 55-year-old bank worker from Athens, can confirm that. "The customers, especially small savers, have recently been withdrawing sums of €3,000, €4,000 or €5,000. That was panic," she said.

Marina S., a 74-year-old widow from Athens, said she has to be extra careful with money these days. "I have no choice but to withdraw money from my savings," she said.

Bad Loans

The shrinking Greek bank deposits compare with bank loans totalling €253 million. Analysts say the share of bad loans could rise to 20 percent next year, or €50 billion, as a result of the recession. This in turn will worsen the already pressing liquidity problems faced by Greek banks.

Nikos B., a doctor in the Greek military, has had enough of the never-ending crisis his country is going through. While the 31-year-old has a secure job, repeated salary cuts have made it increasingly hard for him to make ends meet.

He needs most of his money to make loan repayments for a small car. "How can I clear my account? There's hardly anything in it," he says. He started learning German two months ago and wants to leave Greece. "As soon as possible!"

Nikos pauses and looks down. He quietly utters words that must be painful for a proud Greek. "It would be best to change nationality."

The day is still young and the rumor mill has been eerily quiet so far, but I think it is worth noting that the VIX appears ready to make it five consecutive days (green box) without breaching the psychologically significant 30.00 level (dotted black line) for the first time since July.

For those keeping score at home – or in the office – it has now been two months (as of yesterday) since the VIX has moved above the 40.00 level.

The chart below shows the path of the VIX so far in 2011, which somewhat resembles either Nessie or a cobra that has reared up and is poised to strike. Call it a Rorschach amphibian, if you will.

I have also added a 10-day rate of change study below the main chart to emphasize that while the absolute level of the VIX is important, the recent rate of change can sometimes be a better gauge of evolving market sentiment.

Given all the uncertainty surrounding a group of 17 diverse actors with very different motivations arising from divergent national agendas, economic interests and domestic political situations, it is reasonable to expect the VIX and other measures of uncertainty to climb going into the end-of-week summit. With four hours in the books, today’s action in the SPX is the tightest single-day range in five months ago. When will the next sabot fall?

While I’ve known of DeMark for quite a few years, I’ve never studied his system – so his talk is all Greek to me (and to the Bloomberg folk who tend to interview him). That said, there is some institutional money that pays a lot for his advice, and his recent track record seems to be quite good. If that is any indication Santa Claus will be very good to the bulls, as DeMark says his system signaled the strongest buy signal in 40 years Thanksgiving week, and investors should be long until the 21st when the S&P 500 will get to 1330. But he says this is all within the context of a bear market – so back to bearishness after.

The Standard & Poor’s 500 Index (SPX) may advance to between 1,330 and 1,345 this month before the rally reverses, according to Tom DeMark, the creator of indicators to show turning points in securities.

That would represent a rise of at least 5.9 percent for the benchmark gauge for American equities after the worst Thanksgiving-week drop since 1932 depleted sellers, said DeMark, whose prediction in September that the S&P 500’s decline would stop at 1,076 proved prescient when the index bottomed at 1,074.77 on Oct. 4.

This month’s rally will end when the S&P 500 closes higher on four successive days, DeMark said.

“I had the strongest short-term buy signal I’ve recorded in 40 years” during the week of Thanksgiving, which fell Nov. 24, said DeMark, the founder of Market Studies LLC, in a phone interview. “It’d be an explosive move to the upside.”

DeMark, who has spent more than 40 years developing indicators with names like “sequential” and “countdown,” said on Oct. 25 that a rally by the S&P 500 above 1,254 would “trap” bulls. The index peaked three days later, then dropped 9.8 percent through Nov. 25.

“The market should top out around Dec. 21,” DeMark said today. “The market rhythm and market balance equilibrium all require the market rally. Once that’s completed, the market will have a vacuum on the downside and we should have a sharp decline.”